Essentially, the stock market operates on principles that can often appear counterintuitive to new investorsA compelling debate arises around the inclusion of high-flying stocks, which have skyrocketed in value, into various market indicesMany investors might question why stocks that have appreciated significantly—such as those that have increased tenfold—are selected over those that exhibit more stable, less volatile performanceThis approach can seem flawed, especially when considering that inflated valuations signal potential risks of sharp declines that might weigh down the overall market indexThis raises an important issue regarding investment strategies as well as market behavior.

The concern regarding the inclusion of such stocks is not isolatedMany analysts highlight that the surge of certain stocks can inadvertently lead to a cascading failureFor instance, if we look back at the performance of the Shanghai Composite Index in 2017 when it hovered around 3,000 points, we find substantial losses

Despite China’s GDP growth over that period, individual investors found themselves down around one-third of their investments, generating a sense of pessimism about the potential of the A-share market.

Encounters with frustrating realities in the stock market often mislead investors into believing that their losses are solely driven by market forcesThis mindset can lead to a fatalistic viewpoint on investment opportunities, suggesting that the market is inherently flawed, and potentially drive them away from participation altogetherThis could not be further from the truth, as historical trends reveal that resilience and opportunity co-exist in the markets.

There are prominent voices within financial commentary echoing sentiments on why extreme market fluctuations signal troubleFor example, consider an interview that went viral recently, where the speaker pointed out that while the largest stock index in China, the CSI 300, has experienced substantial growth in GDP, the returns for average investors have been dismal

He compared this with the S&P 500 in the United States, where despite modest GDP growth, stock prices soared markedly higherUnderlining this juxtaposition reinforces the notion that investing in China's markets might be fruitless, a statement ripe for scrutiny.

First, let’s unpack the fundamental principle driving the inclusion of capitalized stocks into indicesMany indices are constructed upon market capitalization, a criterion that holds inherent logic due to its ability to encapsulate value and impact comprehensivelyThis premise can often lead to speculation about whether there are superior measures to analyze potential growth or stability, such as price-to-earnings or price-to-book ratiosHowever, a deeper investigation reveals that market capitalization stands remarkably robust as a measure due to its all-encompassing natureOne might recollect how Charles Dow, the pioneer of the stock index, asserted that averages contain everything—creating a nearly philosophical assertion wherein market cap captures all expectations and information regarding a company.

The rationale appears clear: the market often rewards persistence and growth, embodied within the concept of "the rich get richer." When examining historical examples like the Dow Jones Industrial Average, we see that its constituents have evolved over years, with companies that were once flag bearers disappearing due to competitive pressures or mismanagement

Under a framework that favors stability over recognition of prevailing market dynamics, indices could risk stagnation or a decline, giving way to greater market volatilityThe critical question looms: would we have the same impressive S&P 500 if we applied the same restrictive logic to exclude essentially successful companies?

Pursuing the “stronger getting stronger” paradigm sheds light on the often-misunderstood investor psychologyWhen looking at stocks, it’s important to note that low-priced stocks may not hold the value that high-priced stocks possessMany new investors dismiss high-valued stocks out of fear of the perceived cost, when in reality, investing in these perceived expensive companies may prove to be beneficial as they are often leading the market trends.

Vividly illustrating this principle is Jesse Livermore’s iconic adage, stating: “There is no such thing as a price too high to climb or too low to drop.” Such remarks reveal a critical truth about the stock market's dynamic nature where conventional wisdom is frequently challenged.

Understanding why the “strong get stronger” principle persists necessitates an exploration of several underlying factors

alefox

First, consider the efficiencies of resource optimizationLeading companies often enjoy vast customer bases, providing them with scale advantages that manifest through reinforced competitive advantagesCompanies that establish early dominance can attract customers while also benefiting from enhanced user experience and feedback loopsIt’s a classic cycle of success breeding further success.

Additionally, sunk costs play a significant roleIndividuals and companies alike invest heavily in existing relationships and systemsThe costs of switching suppliers can deter customers from making potentially beneficial choices, while employees also face costs associated with social and professional networksThese barriers to change solidify existing company positions, wherein those already performing well are rewarded with even further opportunity.

Talent acquisition presents another powerful avenue where market leaders maintain an advantage

Market leaders tend to be synonymous with strong performance expectations, allowing them to offer competitive remuneration packages that attract top talentThis creates a cycle where the best talent gravitates toward already prosperous companies, in turn, reinforcing their market positions while rendering their competitors weaker.

Nevertheless, it is worth acknowledging the duality within such paradigms: "what goes up must come down." Extreme trends present risks where all market participants converge, indicating that reaching peak success could foreshadow imminent downturnsHistorically, periods characterized by rapid economic growth often correlate with increased wealth disparitiesThe United States, for example, has seen wealth inequality escalate since the 1980s, which coincides with its most robust economic phases since World War II.

However, a byproduct of wealth inequality tends to be societal discontent, especially when technological progress halts

Breakdowns in social cohesion often give way to conflict and challenge existing structures, to reset and optimize resource allocations—a pattern observed throughout history across various civilizations.

This systemic perspective is crucial for investorsWhile it is vital to recognize leading companies and capitalization trends, one must be vigilant about the inherent risks of their investmentsThe history of industries illustrates that nothing remains impervious to market shifts: for instance, prior to 2020, education was perceived as a lucrative sector, yet sudden regulatory changes shifted dynamics, marking it as a lesson in diligence in evaluating market narratives.

Ultimately, recognizing that most firms encounter oblivion is fundamentalThe crux lies in how individuals navigate their investments—calibrating their observations, remaining discursive in their decision-making, and being ready to act decisively when opportunities arise